Hedge funds 'could drive firms under'

Date: Thursday, May 7, 2009
Author: GAAPweb.com

Hedge funds could lead to an increase in the number of businesses becoming insolvent as they look to extract profits from struggling firms, it has been claimed.

Speaking to the Guardian, Philip Davidson, head of European restructuring at KPMG, explained that funds of this nature often use "loan-to-own" schemes, which sees them gaining control of a firm through a debt-for-equity swap.

"We haven't seen loan-to-own becoming loan-to-bust yet, but I'd be astonished not to see this in the next 12 months - mostly from small US funds," he said.

Mr Davidson also claimed that hedge funds are "less nervous" than traditional lenders when it comes to invoking insolvency to "crack value out of a situation".

Yesterday, data issued by the Insolvency Service showed a sharp increase in the number of business failures.

The figure of 4,941 firms going into liquidation during the first three months of 2009 marked a 56 per cent increase on the same time last year.